July Petroleum Watch

July 2019

PETROLEUM WATCH CALIFORNIA ENERGY COMMISSION

Crude Oil Prices (page 2) PRICES REFINING NEWS

Crude Oil Production & Storage • Crude Oil Prices: On June 28, Brent • Shell Martinez: On June 13, the refinery (page 3) and West Texas Intermediate (WTI) shut down the flexicoker unit because crude prices closed at $67.52 and of mechanical issues. On June 17, the Gasoline and Diesel Retail Prices $58.20, respectively. The Brent crude refinery restarted the flexicoker unit. (page 4) price is $9.92 lower than one year Spot Markets Spreads ago, and the WTI price is $15.93 (page 6) lower than one year ago (page 2).

Gross Margins • California Retail Gasoline Prices: On (page 10) June 24, the price was $3.61, a decrease of $0.27 since the end of May. Through June, the California price averaged $1.00 higher than the national average (page 4). • California Retail Diesel Prices: On June 24, the price was $3.97, a decrease of $0.13 since the end of May. Through June, the California price averaged $0.95 higher than the national average (page 5).

Product of the Energy Assessments Division’s Supply Analysis Office. 1 CRUDE OIL PRICES

Figure 1: Daily Crude Oil Prices

$120 110 Brent West Texas Intermediate $110 CA Estimated Refinery Acquisition Cost 105 Trade Weighted U.S. Dollar Index $100

$90 100

$80 95 $70 (1973 100) = $60 90

$50 Dollars per Barrel (Nominal)Dollars per

85 Index Dollar U.S. Weighted Trade $40

$30 80 Jul-18 Jul-19 Apr-18 Oct-18 Apr-19 Jun-18 Jan-19 Jun-19 Mar-18 Mar-19 Feb-19 Nov-18 Dec-18 Aug-18 Sep-18 May-18 May-19

Source: U.S. Energy Information Administration (EIA), Oil Price Information Service (OPIS) and Federal Reserve Bank of St. Louis.

CRUDE OIL PRICES Downward momentum from May continued WTI slightly outpaced Brent, shrinking the into June and crude prices remained monthly average Brent-WTI difference from June 2019 vs 2018 relatively low for most of the month. On $10.49 to $9.56. For context, the five-year (Percentage Change) June 20, spot prices rose after the EIA average is $3.96, the June 2018 average reported a drop in crude inventories, was $6.53, and is currently averaging Brent 14% lower an indication that summer demand has $8.70 for 2019. The difference could widen WTI 19% lower started to pick up. Despite the drop, U.S. given that the Organization of Petroleum CA-RAC 16% lower inventories are 12 percent higher than in Exporting Countries (OPEC) has agreed to 2018. Crude prices are still significantly extend their supply cuts through March June 2019 Averages lower than in 2018, suggesting that demand 2020.2 However, the high rate of production Brent $64.22 for crude is still below expectations. from the United States and large U.S. crude inventories could dampen the advantage WTI $54.66 Monthly averages for Brent, WTI, and OPEC hopes to gain from their supply curbs. CA-RAC $61.36 California Refinery Acquisition Cost (CA- RAC) were all 10 percent lower than the June 28, 2018 averages in May.1 Brent and CA-RAC Brent $67.52 ended the month at their respective peaks of $67.52 and $64.92 while WTI $58.20 WTI peaked at $59.18 on June 27. CA-RAC $64.92

1 CA-RAC is a weighted average of the prices of California (San Joaquin Valley) crude, Alaskan crude, and foreign crude.

2 “OPEC and allies extend oil supply cut in bid to boost prices,” Reuters, July 2, 2019 https://www.reuters.com/article/ 2 us-oil-opec/opec-and-allies-extend-oil-supply-cut-in-bid-to-boost-prices-idUSKCN1TX0TF. CRUDE OIL PRODUCTION & STORAGE

Figure 2: U.S. Crude Oil Inventories

Source: U.S. Energy Information Administration

• U.S. crude oil production for June • U.S. crude oil inventory in June fell Reductions in crude stocks and higher averaged 12.20 million barrels by 14.8 million barrels to 468.5 refinery inputs are signs that demand per day (bpd). This amount is only million barrels. Current inventories could be picking up in the short run. 50,000 bpd lower than the May are 50.6 million barrels higher However, demand is weaker than in June average of 12.25 million bpd. This than June 2018 inventories. 2018 when inventories were lower and is a 1.30 million bpd increase • According to OPEC’s June Monthly inputs were higher. Crude production and from June 2018, when production Oil Market Report, total May OPEC imports are also lower than the rates averaged 10.90 million bpd. production decreased by 236,000 from the previous year. Average refinery • Crude oil imports for June remained bpd to 29.88 million bpd.3 Their utilization increased this month from at 7.3 million bpd. Compared world oil demand forecast for 2019 90 percent to 94 percent while crude 4 to June 2018 imports, this is a also decreased slightly from 99.94 imports remained relatively unchanged. decrease of 1.1 million bpd. million bpd to 99.86 million bpd. Crude imports fell by 1.1 million bpd over the year as U.S. production rose • U.S. crude oil refinery inputs had by 1.3 million bpd, which means a an increase of 499,000 bpd since portion of the demand for foreign May, finishing June at a four- crudes has shifted to domestic oils. week average of 17.2 million bpd. Refinery inputs are 430,000 bpd lower than a year ago.

3 OPEC June Monthly Oil Market Report, page iii, page 35: https://www.opec.org/opec_web/en/publications/338.htm. 3 4 U.S. EIA, Weekly Supply Estimates https://www.eia.gov/dnav/pet/pet_sum_sndw_dcus_nus_w.htm. GASOLINE AND DIESEL RETAIL PRICES

Figure 3: Gasoline Retail Prices

$4.60 California $4.40 U.S. West Coast (less California) $4.20 $4.00 $3.80 $3.60 $3.40 $3.20 $3.00 $2.80 $2.60 Dollars per Gallon (Nominal) Gallon per Dollars $2.40 $2.20 $2.00 Jul-18 Jul-19 Apr-18 Oct-18 Apr-19 Jun-18 Jan-19 Jun-19 Mar-18 Mar-19 Feb-19 Nov-18 Dec-18 Aug-18 Sep-18 May-18 May-19

Source: U.S. Energy Information Administration

GASOLINE PRICES The average California gasoline retail price In June, the United States and West Coast in June was $3.72, $0.23 lower than in May (less California) average gasoline retail June 2019 vs 2018 when the price averaged $3.95. The June prices decreased from May to $2.72 and (Percentage Change) average was 3 percent higher compared to $3.22, respectively. From June 3, to July same month last year (sidebar). On June 1, the United States price decreased California 3% higher 3, the retail price was $3.83. The price $0.10 from $2.81 to $2.71. During the U.S. 6% lower decreased $0.08 the following week and same time, the West Coast (less California) West Coast 1% lower continued to decrease at $0.08 and $0.07 average price decreased $0.21 to $3.10. the weeks after to $3.61 on June 24. From The most noticeable change was the June 2019 Averages June 24 to July 1, the price increased 2.3 percent increase from June 24 to California $3.72 $0.01 from $3.61 to $3.62, because of the July 1, a $0.06 increase while the price gasoline excise tax rate increasing from across the U.S. was trending downward U.S. $2.72 $0.42 to $0.47 on July 1. For three months (Figure 3). The California retail price West Coast $3.22 straight, the California monthly average will likely increase during July because price has been at least $1.00 higher of the increase in the excise tax rate. Week of June 24, 2019 than the United States average price. California $3.61 U.S. $2.65 West Coast $3.12

4 GASOLINE AND DIESEL RETAIL PRICES

Figure 4: Diesel Retail Prices

$4.60 California $4.40 U.S. $4.20 West Coast (less California) $4.00 $3.80 $3.60 $3.40 $3.20 $3.00 $2.80 $2.60 Dollars per Gallon (Nominal) Gallon per Dollars $2.40 $2.20 $2.00 Jul-18 Jul-19 Apr-18 Oct-18 Apr-19 Jun-18 Jan-19 Jun-19 Mar-18 Mar-19 Feb-19 Nov-18 Dec-18 Aug-18 Sep-18 May-18 May-19

Source: U.S. Energy Information Administration

DIESEL PRICES Diesel retail prices decreased across the California’s strong diesel inventories country in June (Figure 4). June 3 saw the helped lower retail prices. Weekly Fuels June 2019 vs 2018 highest prices of the month when California, Watch shows that diesel production (Percentage Change) the United States, and the West Coast (less started strong, but was in decline for California) hit $4.11, $3.14, and $3.32, the month.5 Despite reduced production, California 1% higher respectively. Prices then slid, with California diesel inventories built up above the five- U.S. 5% lower seeing the largest diesel price decrease. year band. This indicates a decrease in West Coast 6% lower California also saw the largest week-over- demand for diesel, which put downward week change, dropping $0.05 on June 10 pressure on the prices. The United States June 2019 Averages to $4.06. California retail prices dropped a and West Coast prices followed a similar California $4.04 total of $0.14 in June, ending June 24 at pattern but prices did not fall as much $3.97. The United States and West Coast because of U.S distillate stocks have U.S. $3.09 lost an average of $0.03 and $0.04 a week, been going down according to U.S. EIA.6 West Coast $3.26 respectively. The United States and the West Coast lost a total of $0.10 and $0.11 in June Week of June 24, 2019 ending on June 24 at $3.04 and $3.21. California $3.97 U.S. $3.04 West Coast $3.21

5 California Energy Commission. "Weekly Fuels Watch Report." https://ww2.energy.ca.gov/almanac/petroleum_data/fuels_watch/Weekly_FuelsWatch_Summary.pdf. 5 6 U.S. EIA This Week in Petroleum: https://www.eia.gov/petroleum/weekly/distillate.php. SPOT MARKET SPREADS

Figure 5: California Spot Gasoline to NYMEX Futures Price Spread

70 Los Angeles Tight Supplies San Francisco 60

20 Ahead Price Price (cpg)Ahead 10

Month - 0

CARBOB CARBOB Spot Price Less NYMEX Ample Supplies -10

-20 Jul-18 Jul-19 Apr-18 Oct-18 Apr-19 Jun-18 Jan-19 Jun-19 Mar-18 Mar-19 Feb-19 Nov-18 Dec-18 Aug-18 Sep-18 May-18 May-19

Source: U.S. Energy Information Administration and OPIS

The Los Angeles (LA) and San Francisco increased, putting downward pressure on GASOLINE SPOT - FUTURES SPREAD (SF) gasoline spot less New York Mercantile the spreads, leading to a decline in the Exchanges (NYMEX) futures spreads were spreads that started in May and continued June 2019 vs 2018 each $0.19 on June 3 (Figure 5), monthly through mid-June. June is the first month Los Angeles $0.01 higher highs for both spreads. The spreads since August 2018 that the LA and SF spot decreased steadily, until June 14 to June prices have been at a discount to NYMEX. San Francisco same 17 when the spreads increased briefly California gasoline production averaged June 2019 Averages before continuing to fall. The spreads 6.6 million barrels per week (bpw) and was decreased to monthly lows of -$0.08 Los Angeles $0.06 within the five-year band except for the for LA and -$0.05 for SF on June 21. week of June 21, when production fell below San Francisco $0.05 The spreads then increased to finish the the five-year-low Figure( 6). California month at $0.08 for LA and $0.05 for SF. June 28, 2019 gasoline inventories decreased slightly from Los Angeles $0.08 The spreads have come down after multiple 11.7 million barrels to 11.5 million barrels outages at refineries during March and April between June 7 and June 28, respectively. San Francisco $0.05 that caused the spreads to spike.7 In May, the refineries began to bring equipment back on-line. Production and inventories

7 California Energy Commission. June 2019. Petroleum Watch: https://www.energy.ca.gov/sites/default/files/2019-06/2019-06_Petroleum_Watch.pdf. 6 SPOT MARKET SPREADS

Figure 6: Gasoline Production and Inventories

8875 California CARB Gasoline Production (with 5-Year High-Low Band) 8375

7875

7375

6875

6375 Thousands of Barrels per week

5875

5375

4875 6/1/18 9/7/18 2/8/19 3/8/19 4/5/19 5/3/19 6/15/18 6/29/18 7/13/18 7/27/18 8/10/18 8/24/18 9/21/18 10/5/18 11/2/18 1/11/19 1/25/19 2/22/19 3/22/19 4/19/19 5/17/19 5/31/19 6/14/19 6/28/19 10/19/18 11/16/18 11/30/18 12/14/18 12/28/18

California CARB Gas and Blendstocks Inventories 15250 (with 5-Year High-Low Band)

14250

13250

12250

Thousands of Barrels 11250

10250

9250

8250 6/1/18 9/7/18 2/8/19 3/8/19 4/5/19 5/3/19 6/15/18 6/29/18 7/13/18 7/27/18 8/10/18 8/24/18 9/21/18 10/5/18 11/2/18 1/11/19 1/25/19 2/22/19 3/22/19 4/19/19 5/17/19 5/31/19 6/14/19 6/28/19 10/19/18 11/16/18 11/30/18 12/14/18 12/28/18

Source: California Energy Commission PIIRA data

7 SPOT MARKET SPREADS

Figure 7: California Spot Diesel to NYMEX Futures Price Spread

70 Los Angeles San Francisco 60

40 Tight Supplies 30

Month-Ahead (cpg) Price -10 Diesel SpotPrice Less NYMEX Ample Supplies -20

-30 Jul-19 Jul-18 Apr-19 Apr-18 Oct-18 Jun-19 Jun-18 Jan-19 Feb-19 Mar-19 Mar-18 Nov-18 Dec-18 Aug-18 Sep-18 May-19 May-18

Source: U.S. Energy Information Administration and OPIS

June opened with California diesel spot to June’s Petroleum Watch discussed unplanned DIESEL SPOT - FUTURES SPREAD NYMEX price spreads still in decline from refinery outages in May raising diesel price record highs in May (Figure 7). LA futures spreads in California. Refinery operations June 2019 vs 2018 spread began the month at $0.05 above recovered in June, as West Coast refinery Los Angeles $0.02 lower NYMEX while SF was $0.07 above, then both utilization increased from 85 percent on May San Francisco $0.01 lower spreads bottomed out mid-month. LA hit a 10 to 92 percent by June 14.8 The recovery low of $0.04 below NYMEX on June 17 and brought down price volatility from May as spot June 2019 Averages SF was even (zero difference) to NYMEX on markets calmed from indications of recovery. Los Angeles $0.03 June 13. Both LA and SF spreads peaked on California diesel production averaged 2.8 June 27 at $0.07 and $0.11, respectively. San Francisco $0.05 million barrels per week, keeping within In comparison to May, diesel differentials in the upper half of the five-year band (page June 28, 2019 June were less volatile. LA monthly average 9). June diesel inventories did well in price spread was $0.03, $0.24 less than Los Angeles $0.06 comparison to the past five years, averaging May’s average spread. SF monthly average 190,000 barrels more per week than June San Francisco $0.10 price spread was $0.05, $0.17 less than 2018 (page 9). June typically brings about the average spread in May (sidebar). the end of planting season for farming. California spot prices in July should continue to stay low if inventories remain at current levels until harvesting season in October.

8 8 Weekly West Coast (PADD 5) Percent Utilization of Refinery Operable Capacity, U.S. EIA, July 8, 2019: https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=W_NA_YUP_R50_PER&f=W. SPOT MARKET SPREADS

Figure 8: Diesel Production and Inventories

California Diesel Production (with 5-Year High-Low Band)

3700

3200

2700

Thousands of Barrels per week 2200

1700 6/1/18 9/7/18 2/8/19 3/8/19 4/5/19 5/3/19 6/15/18 6/29/18 7/13/18 7/27/18 8/10/18 8/24/18 9/21/18 10/5/18 11/2/18 1/11/19 1/25/19 2/22/19 3/22/19 4/19/19 5/17/19 5/31/19 6/14/19 6/28/19 10/19/18 11/16/18 11/30/18 12/14/18 12/28/18

5550 California Diesel Inventories (with 5-Year High-Low Band)

5050

4550

4050

Thousands of Barrels of Thousands 3550

3050

2550 6/1/18 9/7/18 2/8/19 3/8/19 4/5/19 5/3/19 6/15/18 6/29/18 7/13/18 7/27/18 8/10/18 8/24/18 9/21/18 10/5/18 11/2/18 1/11/19 1/25/19 2/22/19 3/22/19 4/19/19 5/17/19 5/31/19 6/14/19 6/28/19 10/19/18 11/16/18 11/30/18 12/14/18 12/28/18

Source: California Energy Commission PIIRA data

9 GROSS MARGINS

Figure 9: Gross California Gasoline and Diesel Margins

$2.00 Gasoline Retail Price Less Refiner Acquisition Cost of Crude

Diesel Retail Price Less Refiner Acquisition Cost of Crude $1.75

$1.50

$1.25

Dollars per Gallon (Nominal) Gallon per Dollars $1.00

$0.75 Jul-18 Jul-19 Oct-18 Apr-18 Apr-19 Jun-18 Jan-19 Jun-19 Mar-18 Mar-19 Feb-19 Nov-18 Dec-18 Aug-18 Sep-18 May-18 May-19

Source: U.S. Energy Information Administration and OPIS

CRUDE TO RETAIL MARGINS Despite an initial increase in the gasoline retail gasoline and diesel prices supported the and diesel margins at the beginning of decrease in the margins (Figures 3 and 4). June 2019 vs 2018 June, gross margins decreased noticeably The drop in the margins was also supported (Percentage Change) over the month (Figure 9). The margins by healthy inventories that were within or peaked on June 5, when the gasoline above the five-year band Figures( 6 and 8). Gasoline 32% higher margin reached $1.76 and the diesel margin The June peak in the gasoline margin Diesel 23% higher reached $1.53. The margins then fell steadily is the highest seen since August 2015. with the gasoline margin at $1.47 and June 2019 Averages In February 2015, an explosion at the the diesel margin at $1.30 on June 28. Gasoline $1.62 ExxonMobil refinery in Torrance caused The margins are finally seeing relief after the gasoline margin to spike and remain Diesel $1.42 numerous refinery issues in March, April, high for several months. The June peak June 28, 2019 and May caused the margins to spike. As the in the diesel margin peak is equal to the refineries completed repairs, the margins peak in December 2018. The peak in Gasoline $1.47 started to decline. Declining California December 2018 is the highest peak in Diesel $1.30 the data dating back to January 2014.

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